The world of binary options is growing at a rapid pace compared to many of the other investment markets out there. While many traders are getting turned on to this type of option contract, a lot of new people do not understand the terminology that is thrown around. Here are some of the basic terms that traders may run into in the options market.
Binary Option - A binary option is a of options contract in which there are only two possible outcomes. This type of option is also sometimes referred to as a digital option or an “all or nothing” option. With this type of option contract, there is a fixed payout that occurs if an underlying security reaches a specified strike price by a certain time. If the price is not reached, then there is no payout to the option holder.
A call option is a type of option in which the trader predicts that the price of a security will exceed a certain threshold. For example, if the trader thinks that the price of a stock will go above $100 per share, then he places a call option.
A put option is the opposite of a call option. With a put option, the trader expects that the price of a security will fall below a certain price. This is what a trader uses when he thinks that the price of a security will decline in the near future.
The strike price of an option is the price at which the payout is reached. It is this price that must be reached in order for the trader to win. For example, the strike price could be $50 if the option specifies that the price of a stock must reach $50 before a payout can occur.
The payout is the amount of money that the options broker pays the trader if he wins the trade. The payout is predetermined and the trader knows exactly what to expect before getting involved.
The expiration is the time at which the options contract runs out. This is when it is determined whether the options trader wins or loses a trade. When the options contract expires, the price of the security have to be above the strike price on a call option in order for the trader to win. If it’s below the strike price when the expiration occurs, then the trader does not win any money.
In the Money
This is an expression that basically means the trader one the trade. If the price of the security gets above the strike price by the time the option expires on a call trade, then the trader is “in the money.”
Out of the Money
As expected, this is the opposite of the phrase “in the money.” This occurs when a trader loses a trade. If the price of the underlying security is below the strike price at expiration on a call trade, then the trader is “out of the money.”
Fundamental analysis is a type of analysis that is commonly used in the options market. With this type of analysis, traders have to look at the underlying factors that contribute to the prices of securities that they are trading. For example, if a trader were about to place an option on a stock, he might look at the financial reports of that company to determine long-term health.
Technical analysis is a different type of analysis that traders use in order to predict where the price of a security will go. This type of analysis utilizes technical indicators and price charts to make predictions. Technical analysts believe that everything one needs to know about a security is present in the current price of that security. They believe in the efficient markets hypothesis, which states that markets are completely efficient. This means that everything is reflected in the current price of a security without needing to look at any outside factors. Technical analysis is especially popular when trading currencies and commodities.
Over the Counter
Over the counter is a term that is used to describe a situation in which securities are bought and sold between two specific parties. This the way in which most binary options are traded. A broker sells a contract directly to a buyer. By comparison, some securities are sold in an exchange, where many different sellers and buyers come together.
With a basic understanding of this terminology, an individual can gain basic knowledge of the options market. Besides learning the terminology, a trader should also take the time to learn a successful trading strategy. Once these aspects are mastered, they may be able to bring in a significant amount of money on the options market. The potential rewards are very high for this market.